Stock Traders Are Not Pundits; They Pay What They Think Stocks Are Worth

Today's lead New York Times story (2/1/09)–subheaded in the print edition "Scant Details, and Wall Street Reacts With a 4.6 Percent Plunge"–is a classic example of the fallacy of treating stock market prices as a kind of opinion poll. Reporters Stephen Labaton and Edmund L. Andrews wrote: "The initial assessment of the plan from the markets, lawmakers and economists was brutally negative, in large part because they expected more details."

Presumably the reporters talked to lawmakers and economists and got their responses directly. But when one is talking about the reaction of the market, one can only look at the direction of prices, which are set by traders who are primarily interested not in assessing economic plans, presumably, but in valuing stocks at what they're actually worth.

There's a school of thought that holds that the best response to the banking crisis is to declare that troubled banks are insolvent, have the government take them over and run them until they have a positive value again, and then sell them off. Some economists suspect that this may actually be the administration's unspoken plan, with the thinking being that the government might be reluctant to publicly acknowledge that major parts of the financial system are worthless. If stock traders believe that this is in fact the plan, then they would rationally sell problematic bank stocks for whatever they can get, because those stocks would soon be worthless.

Conversely, many economists believe that it would be a bad idea to give large sums of money to insolvent banks, because the banks' management and stockholders might just pocket the money without improving the health of the financial sector. Such a plan might boost bank stocks without actually helping the economy.

Yesterday, according to the New York Times business section ("Stocks Slide as New Bailout Disappoints," 2/10/09), the stock market decline was

led by steep declines in Bank of America, Citigroup and large banks already leaning on taxpayers for support. Regions Bank, SunTrust, KeyCorp and Fifth Third fell even more as investors worried that regional banks could be vulnerable to a new "stress test" aimed at revealing the weakest links in the industry.

In many ways, the financial crisis is about assets being misvalued and the system threatening to grind to a halt as institutions are reluctant to acknowledge more realistic valuations. If the Treasury plan means that banks that are worth nothing will soon be treated as though they are worth nothing, that could be a big step in the right direction. In short, plunging bank stock prices could mean that Wall Street thinks the administration is on the right track.

Extra! Magazine Editor Since 1990, Jim Naureckas has been the editor of Extra!, FAIR's monthly journal of media criticism. He is the co-author of The Way Things Aren't: Rush Limbaugh's Reign of Error, and co-editor of The FAIR Reader: An Extra! Review of Press and Politics in the '90s. He is also the co-manager of FAIR's website. He has worked as an investigative reporter for the newspaper In These Times, where he covered the Iran-Contra scandal, and was managing editor of the Washington Report on the Hemisphere, a newsletter on Latin America. Jim was born in Libertyville, Illinois, in 1964, and graduated from Stanford University in 1985 with a bachelor's degree in political science. Since 1997 he has been married to Janine Jackson, FAIR's program director. You can follow Jim on Twitter at @JNaureckas.

Jim Naureckas states:
"the thinking being that the government might be reluctant to publicly acknowledge that major parts of the financial system are worthless."

We all much of what the banks hold is worthless and they know that we know. So why all of the secrecy?

My guess is that if the banks books ever become public we would learn something more sinister. We might learn how much of their business is off shore or how much is with world drug dealers or the Russian Mafia or pick you own unsavory business.

We might learn they have been cheating on their taxes or about other illegal transactions. We might learn how many politicians or other elites have used these banks for illegal transactions. I don't think that we will never see the books of the bankrupt banks.

Jim Naureckas omits the other possibility ÃƒÆ’Â¢ÃƒÂ¢”Å¡Â¬”Â and problem ÃƒÆ’Â¢ÃƒÂ¢”Å¡Â¬”Â with using the stock market and stocks as a barometer of corporate worth, and the economy generally.

And that is the fact that stock traders don't *always* pay what they think stocks are worth ÃƒÆ’Â¢ÃƒÂ¢”Å¡Â¬”Â they sometimes pay more for stocks if they think the price will rise, *regardless* of the health of the company (or the economy).

When the "mob" dives into a particular stock ÃƒÆ’Â¢ÃƒÂ¢”Å¡Â¬”Â or set of stocks (e.g., tech) or the stock market as a whole ÃƒÆ’Â¢ÃƒÂ¢”Å¡Â¬”Â traders will ride a stock up if they think they can make money on the frenzy and still get out before the whole thing tanks.

Thus, when stocks tank because companies are doing poorly, or the economy (really, the economic psychology) is in a funk, stock traders will actually start *buying* so-called "undervalued" stocks in order to kickstart a run-up and make money off of so-called bargains.

They don't care if the stock goes down again, because they're only in it for the short-term gain. This why paying attention to short-term stock trends ÃƒÆ’Â¢ÃƒÂ¢”Å¡Â¬”Â *any* of them (including the ones Naureckas cites in his post ÃƒÆ’Â¢ÃƒÂ¢”Å¡Â¬”Â is nonsensical.

We'd all be better off if the media ÃƒÆ’Â¢ÃƒÂ¢”Å¡Â¬”Â including FAIR and the progressive media ÃƒÆ’Â¢ÃƒÂ¢”Å¡Â¬”Â stopped trying to perform "Kremlinology" on the stock market and paid attention to more accurate and reliable metrics of corporate performance and the economy. The stock market is a financial soap opera, not seismograph …